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The Pakistan Development Review

45 : 4 Part II (Winter 2006) pp. 1265–1276

Determinants of Exports in Developing Countries

MUHAMMAD TARIQ MAJEED and EATZAZ AHMAD*

I. INTRODUCTION
According to the orthodox classical economist as well to the modern liberal view
trade is equivalent to an engine of economic growth. Exports promotion strategy is often
in accordance with the principle of comparative advantage, when a country specialises in
a product, which it can produce competitively. The goods become available to the
community of the world at cheaper prices. The markets are extended. The internal and
external economies are attained. Income and employment levels expand. Consequently
process of economic development is facilitated. In a nutshell, putting more emphasis on
the promotion of exports would permit the optimal allocation of world resources and,
therefore, returns from trade sector depend upon accelerating growth of exports.
The proposition of FDI led exports growth is controversial in empirical literature.
But the role of domestic investment is believed to be much important for export
expansion strategies. In any case the importance of FDI, if any, cannot diminish the role
of productive investment from the domestic economy. While private domestic investment
can be regarded as a permanent and reliable channel to enhance production capacity,
investment in public sector has been considered important, for example in roads,
communication and other public goods and services that are essential to stimulate private
investment. Furthermore, government has a decisive role through support for research
and contract with foreign buyers as well as in facilitating access to credit to both directly
and indirectly exporting terms.
Funke and Holly (1992) argue that the majority of the previous approaches have
emphasised demand factors. Such models have generally been rather unsuccessful in
explaining long run trends in export performance.1 The study takes into account both
supply side and demand side factors and applies the model to the West German
manufacturing sector using quarterly data over the period 1961.1 to 1987.4. The findings
of the study suggest that supply side factors are much more important for explaining
export performance than demand side factors.
Togan (1993) investigates the changes in the structure of export incentives in
Turkey from 1983 to 1990. The export incentives are export credits, tax rebate scheme,
premium from the “Support and Price Stabilisation Fund”, duty free imports of
intermediates and raw materials, and exemption from the value added tax, foreign

Muhammad Tariq Majeed <tariq@qau.edu.pk> and Eatzaz Ahmad <eatzaz@qau.edu.pk> are

respectively Lecturer and Professor of Economics, Quaid-i-Azam University, Islamabad.
1
See the debate between Landesman and Snell (1989) and Holly and Wade (1991), for example.
1266 Majeed and Ahmad

exchange allocations, exemption from the corporate income tax and other subsidies. The
study finds that during the 1980s the level of the economy-wide subsidy rates and that of
inter-industry dispersion of incentives has substantially been lowered. The study also
finds that the Turkish export- and import-competing industries have benefited from the
export incentives more than the other sectors.
In a comprehensive study Riedel, Hall and Grawe (1984) investigate quantitatively
the determinants of export performance in India on the basis of time-series analysis over
the period 1968-1978. The study analyses the effects of relative price of exports, relative
domestic demand and domestic profitability on export performance. The dependent
variable used is the ratio of indexes of constant price exports to industrial production.
Exports are expressed as a ratio to output in order to account for the effect of expansion
of production capacity. The results support the view that domestic market conditions
strongly influence export behaviour. The variable measuring domestic profitability or
relatively domestic demand is found to be statistically significant in explaining export
behavior in 23 of 30 sectors. Relative price, incorporating export policy incentives and
the exchange rate turn out to be statistically significant in only 10 of the 30 sectors.
However, relative prices tended to be significant in those sectors where comparative
advantage is presumed to be strongest, for example, ready-made garments, carpet
weaving, handicrafts and metal products. The study has the loophole of using short
period. It requires a long period for better estimates.
A more recent study of Sharma (2001) investigates exports determinant in India
using annual data for 1970-98. The study uses simultaneous equation framework. The
results of study suggest that demand for Indian exports increase when its export price
falls in relation to world prices. Furthermore, the real appreciation of the rupee adversely
effects Indian exports. Exports supply is positively related to the domestic relative price
of exports and higher domestic demand reduces export supply. Foreign investors appear
to have statistically no significant impact on export performance, although the coefficient
of FDI has a positive sign.
Hoekman and Djankov (1998) analyse the magnitude of change in the export
structure in Central and Eastern European countries. The study investigates the relative
importance of processing (subcontracting) trade, imports of input, and FDI as
determinants of the countries’ export performance in European Union markets. The
findings of the study suggest that in most countries export of intermediate goods and
machinery drive the changes in export structure. Local enterprises apparently exploit the
opportunity to acquire foreign inputs and know-how in order to improve production
quality, thereby expanding their export market share in the European Union.
The study observes that FDI has been concentrated in the sectors where the
Central and Eastern European countries do not have a revealed comparative advantage
(that is, they are not relatively specialised in terms of their export share in Eastern Union
markets). Of the five countries for which data are available, Poland is the only one with a
significant positive association between FDI and exports structure. The negative
relationship for the other countries implies that FDI could be a force for change. Foreign
investors must perceive the industries concerned to be viable in the median term, and
over time this FDI may lead to greater changes in the countries’ export composition.
Thus FDI complements efforts by domestic industries to restructure and upgrade
production facilities.
 Determinants of Exports in Developing Countries 1267

It appears from the above review that studies on export determinants are mostly
based on country specific factors as export expansion schemes, subsidies, etc. There is
hardly any study that conducted panel data estimation on export determinants for a large
number of developing countries.
The present study aims to find out the internal and external determinants of export
promotion in a large set of developing countries. In this study we will follow panel data
estimation procedure for 75 developing countries. The rest of the discussion is organised
as follows: Section II explains the model and framework of analysis: Section III
introduces the data set and the construction of variables. Section IV puts forward the
main findings from empirical analysis. Section V presents a summary results with some
policy implications.

II. METHODOLOGY
In this chapter, we formulate a framework of analysis to determine the effects of
various factors on exports in developing countries, which we have taken in our sample.
The underlying objective is to explain the rational behind exports.
In the export function we consider all those factors that can potentially play a
meaningful role in the determination of exports in the developing countries. Export
promotion strategies have a great deal in trade liberalisation regime. On one hand,
developing countries are facing twin deficits, namely, fiscal deficit and trade deficit. On
the other hand, external debt crises create further financial problems. In such sorry state
of financial crises, the sole of FDI inflow is not sufficient. But the expansion of export
sector for the improvement of financial disturbance also needs to be addressed. In this
respect, we identify various determinants of exports. Export growth is basically
determined by external factors, for this we employ two variables FDI and real exchange
rate. However, exports are also affected by domestic factors. In this respect we
incorporate GDP, GDP growth rate, indirect taxes, communication facilities, savings,
industrialisation, labour force and official development assistance. Specified equation for
export promotion is as follow.
EXit= f(FDIit GDPit GROWit SAVit ODit ITit EXCHit TVit TPit VADit LFit), … (2)
where the subscript i (=1,…n) represents country and t (= 1,…T) the period of time
(years). The variables appearing in the equation are defined as follows.
EX = Exports as a percentage of GDP,
FDI = Foreign Direct Investment as a percentage of GDP,
GDP = Gross domestic production in constant prices of 1989,
GROW = Annual percentage growth rate of GDP,
SAV = National savings as a percentage of GDP,
OD = Official development assistance as a percentage of GDP,
IT = Indirect taxes as a percentage of GDP,
EXCH = Real exchange rate. It is obtained by multiplying the nominal exchange
rate by US CPI and divided by domestic CPI,
TV = Number of televisions per 1000 persons,
TP = Number of telephones per 1000 persons,
1268 Majeed and Ahmad

VAD = Industry value added as a percentage of GDP,

LF = Total labour force,
Justification of Exports Determinants

Production Level
It is the supply side determinant of exports [see Bertil (1968)]. The higher level of
production is the main cause of export expansion, because surplus of output can be
exhausted in international markets. In a close economy surplus of production leads to fall
in prices, which, in turn, creates pessimism among producers. In an open economy such
surpluses create foreign reserves by exporting production. So we expect the positive
impact of GDP on exports growth. In empirical literature Kumar (1998) confirms the
positive impact of GDP on exports.

Production Growth
Growth of the GDP is an indicator of future potential and sustainability of
production level. Growth is more valid determinant of exports as compare to GDP
because it measures the sustainability of output levels. So we expect positive impact of
GDP growth on exports expansion.

Real Exchange Rate

A fall in the relative domestic prices due to exchange rate depreciation makes
exports cheaper in international markets resulting in increased demand for exports,
therefore we expect the positive impact of real exchange rate on export growth.

Communication Facilities
In this era, when time is shrinking, the importance of communication facilities has
become more important. For the measurement of communication facilities we employ
two variables, namely, the number of television sets and the number of telephones sets in
use. These two variables have also been justified in empirical literature [Kumar (1998)].
Expansion of such facilities has favourable effect for exploration and excess to the world
markets. Hence we expect the positive impact of provision of such facilities.

Indirect Taxes
The effect of this variable is expected to be adverse on production decisions. But
we cannot rule out the possibility of positive effect on exports due to fiscal incentives by
government. Specifically, if government provides tax exemptions for the expansion of
exports sector, higher rate of indirect taxes can have the negative effect on domestic
demand resulting in exportable surplus.

Official Development Assistance

Large size of official development assistance implies is likely to facilitate growth
of infrastructure, which in turn will favourably affect investment climate. We expect
positive effect of this variable on export growth.
 Determinants of Exports in Developing Countries 1269

Savings
Generally, in developing countries the proportion of savings used for non-
productive factors, for example purchasing of jewellery, property, etc. is larger. Therefore
higher savings result is large volume of goods made available for exports. So we expect
positive impact of this variable on exports.

Industrialisation
The agricultural output is subjected to uncertainty, particularly because of
operation of nature’s vagaries. Accordingly, now a day, just on the basis of agricultural
output no country has greater incomes and outputs. On the other hand, it is the
industrialisation that results in maximum utilisation of natural and human resources of the
country and industrial output is more or less stable. Thus industrialisation will provide
greater stimulus to output and national income of the country. Industrialisation also
promotes agriculture sector and agriculture uplifts the industrial sector. The industrial
development will have the effect of developing the allied and related sectors.
The situation of persistent deficit in balance of payments is attributed to
concentration in agriculture exports, falling prices of exports, the imports restrictions by
rich countries and the increasing import bill due to increased demand for oil and
manufactured products, etc. Through industrialisation a country can enhance industrial
production; replace the agriculture exports by the industrial exports, which command
reasonable and stable prices in the world markets. Moreover, industrialisation reduces
dependence on imports by initiating the process of import substitution. Keeping in view
all such arguments, we conclude that industrialisation has favourable effect on exports.

Labour Force
Optimum utilisation of resources depends upon the labour force. Labour force
positively determines production levels. In developing countries large volume of labour
force in agriculture sector can be transferred in industrial sector without affecting the
output of agriculture sector, because this sector is confronted with the problem of
disguised unemployment. Such labour force can be properly utilised in industrial sector
that in turn expand export sector. In empirical literature, Pfaffermayr (1996) justifies the
positive impact of labour force on exports.
Skilled labour force is the source of competitiveness in production and lower cost
of production. Many developing countries exploit the advantages of skilled labour force
for competitiveness in export sector. At the same time many developing countries have
unskilled labour force. The effect of unskilled labour force is opposite on competitiveness
in export sector. Hence we can have positive or negative effect of labour force on
exports.

Foreign Direct Investment

In empirical literature the role of FDI in exports promotion is controversial. Many
studies [e.g. Pfaffermayr (1996)] find positive effect of FDI on exports. The main reason
underlying is the export oriented MNCs. Since government provides facilities for export
promotion, such facilities also attract foreign investors. In order to promote exports
1270 Majeed and Ahmad

government can adopt FDI-led export growth strategies with twin objectives of capturing
the benefits of both FDI inflow and exports growth. On the other hand, many studies find
insignificant or weak impact of FDI on exports [see Hoekman and Djankov (1997)]. Such
studies point out that the role of FDI in export promotion in developing countries remains
controversial and depends crucially on the motive for such investment. If the motive
behind FDI is to capture domestic market (tariff-jumping type investment), it may not
contribute to export growth. On the other hand, if the motive is top tap exports markets
by taking advantage of the country’s comparative advantage, then FDI may contributes to
export growth.

III. DATA AND ESTIMATION PROCEDURE

The data for this study have been taken from World Development Indicators
(WDI) 2005. Originally a sample of 155 countries was selected but after screening
process 75 countries was chosen for which data on most of the variables were available
for at least 15 years. For each variable expressed in terms of ratios to GDP, both the level
of the variable and the GDP are measured in US dollar at current prices.
Gross foreign direct investment is measured as percentage of GDP. Gross foreign
direct investment is inflows of foreign direct investment recorded in the balance of
payments financial account.
Official exchange rate is measured as the period average of the number of local
currency units per US$. Official exchange rate refers to the actual principal exchange rate
and is an annual average based on monthly averages determined by country authorities or
on rates determined largely by market forces in the legally sanctioned exchange market.
To convert the nominal exchange rate into real exchange rate we multiply the nominal
exchange rate with the US CPI and divided it by domestic CPI.
Gross national savings, defined as gross domestic savings plus net income and net
current transfers from abroad, are measured as percentage of GDP.
Official development assistance and net official aid record the actual international
transfer by the donor of financial resources or of goods or services valued at the cost to
the donor, less any repayments of loan principal during the same period. Aid dependency
ratios are computed using values in U.S. dollars converted at official exchange rates.
Industry value added is measured as percentage of GDP. It comprises of value
added in mining, manufacturing, construction, electricity, water, and gas. Value added is
the net output of a sector after adding up all outputs and subtracting intermediate inputs.
It is calculated without making deductions for depreciation of fabricated assets or
depletion and degradation of natural resources.
Total labour force comprises people who meet the International Labour
Organisation (ILO) definition of the economically active population: all people who
supply labour for the production of goods and services during a specified period. It
includes both the employed and the unemployed members of labour force. While national
practices vary in the treatment of such groups as the armed forces and seasonal or part-
time workers, in general the labour force includes the armed forces, the unemployed and
first-time job seekers, but excludes homemakers and other unpaid caregivers and workers
in the informal sector.
 Determinants of Exports in Developing Countries 1271

Telephone mainlines are measured as the number of lines per 1,000 persons.
Telephone mainlines are telephone lines connecting a customer’s equipment to the public
switched telephone network. Likewise television sets are also measured as the number of
sets in use per 1,000 persons.
Net indirect taxes are measured as percentage of GDP. These taxes are the sum of
indirect taxes less subsidies. Indirect taxes are those taxes payable by producers that
relate to the production, sale, purchase or use of the goods and services. Subsidies are
grants on the current account made by general government to private enterprises and
unincorporated public enterprises. The grants may take the form of payments to ensure a
guaranteed price or to enable maintenance of prices of goods and services below costs of
production, and other forms of assistance to producers.
We now discuss estimation procedure for our model. The use of pooled time-series
and cross-section data provide large sample that is expected to yield efficient parameter
estimates. Since political, structural and institutional characteristics vary from country to
country, imposing a single relationship to all units is likely to suppress information. In
order to overcome this problem we will use the approach of uniform shifts. The
econometric literature suggests two approaches for uniform shifts [Green (1993); Kmenta
(1986) and Maddla (1977)] the fixed effects and random effects model. In the present
study we will follow fixed effects model.

IV. EMPIRICAL RESULTS AND INTERPRETATION

In this section we report the empirical results based on pooled data for 75
developing countries over the period 1970 to 2004. We select a large set of developing
countries for empirical investigation. The panel data model is estimated by allowing the
deterministic shifts across the countries. Since the model uses panel data, it is likely to
suffer from autocorrelation as well as hetroskedasticity. Both are removed by applying
appropriate econometric techniques. The results of estimation are presented in Tables 1a
and Table 1b.

Table 1a
Parameter Estimates of the Fixed Effects Model
Variables Fixed Effects Variables Fixed Effects
FDI 0.000261 EXCH 3.96E-06
(1.4945) (17.48)*
GDP 7.15E-20 TP 0.000326
(4.91)* (6.41)*
Grow 0.012143 TV 9.85E-05
(4.05)* (4.66)*
SAV 0.389982 LF 0.242757
(15.66)* (2.72)*
OD 0.164817 VAD 0.003333
(8.38)* (10.27)*
IT 0.037753 AR (1) 0.73764
(2.08)* (38.16)*
R2 .948 A. R2 .943
DW 1.999 F 651
Note: The numbers in parentheses are the computed t-values. The statistics significant at 5 percent level are
indicated by *.
1272 Majeed and Ahmad

Table 1b
Country-specific Intercepts of the Fixed Effects Model
Fixed Fixed Fixed Fixed
Countries Effects Countries Effects Countries Effects Countries Effects
Angola 0.3600 Sri Lanka 0.0387 Dominican 0.0035 Paraguay 0.0399
(0.05) (1.43) Republic (1.92) (1.51)
Argentina –0.2537 Lesotho 0.0238 Algeria –0.1484 Saudi Arab 0.0667
(–4.84)* (1.92) (–4.24)* (1.87)
Burundi –0.1263 Madagascar –0.0073 Ecuador –0.0678 Senegal 0.0756
(–2.33)* (–1.57) (–3.04)* (0.90)
Benin 0.0305 Mexico –0.0957 Egypt, Arab –0.0626 Sierra –.0282
(1.04) (–3.13)* Rep. (–.73)* Leone (–.89)
Burkina –0.1391 Mali –0.0270 Fiji 0.3478 El –.0623
Faso (–2.53)* (–1.62) (1.90) Salvador (–.49)*
Bahrain 0.1172 Mozambique -0.1410 Gabon 0.0560 Swaziland 0.4597
(0.16) (–2.35)* (1.57) (2.80)*
Belize 0.2091 Mauritania 0.1474 Ghana –0.0494 Chad –0.0494
(0.99) (0.39) (–1.91) (–1.76)
Bolivia –0.0824 Mauritius 0.2353 Gambia, The 0.1963 Thailand –0.0860
(–2.71)* (0.44) (0.21) (–2.46)*
Brazil –0.2813 Malaysia 0.1935 Guatemala –0.0414 Togo 0.1706
(–4.87)* (0.02) (–2.29)* (0.05)
Botswana 0.0342 Niger –0.0381 Guyana 0.5325 Trinidad & 0.0141
(1.58) (–1.81) (2.80)* Tobago (2.50)*
Chile –0.0753 Nigeria 0.0240 Honduras 0.0640 Tunisia 0.0999
(–3.05)* (2.04)* (1.08) (0.88)
China –0.2870 Nicaragua 0.2144 Haiti –0.1013 Turkey –0.3606
(–4.00)* (0.19) (–2.39)* (–5.14)*
Cote 0.1189 Nepal 0.1300 Indonesia –0.0519 Tanzania 0.0195
d'Ivoire (0.46) (0.64) (–2.69)* (1.35)
Cameroon –0.0316 Pakistan –0.0813 India –0.1803 Uganda –0.1126
(–2.06)* (–2.75)* (–3.29)* (–2.29)*
Congo, 0.1106 Panama 0.0640 Iran, Isl. –0.2925 Venezuela, –0.1151
Rep. (0.90) (0.89) Rep. (–3.87)* RB (–3.58)*
Colombia –0.1646 Peru –0.1853 Jamaica 0.1500 South –0.0653
(–3.66)* (–4.21)* (0.83) Africa (–2.99)*
Cape –0.0362 Philippines 0.0214 Jordan 0.2677 Zambia –0.0100
Verde (–1.57) (1.98)* (1.76) (–1.96)
Costa 0.0478 Papua N. 0.1359 Kenya 0.0220 Zimbabwe –0.0476
Rica (1.35) Guinea (0.70) (1.28) (–2.25)*
Czech 0.0092 Poland –0.1806 Korea, Rep. –0.1602
Republic (1.71) (–3.38)* (–3.36)*
Note: The numbers in parentheses are the computed t-values. The statistics significant at 5 percent level are
indicated by *.

In literature the first and foremost determinant of exports is FDI. However, in

empirical literature the effects of FDI on exports are controversial. Our study finds
positive but insignificant impact of FDI on export growth. The success stories of East and
South East Asian countries suggest that FDI is a powerful tool of export promotion
because multinational companies (MNCs) through which most FDI is undertaken have
the well-established contacts and the up-to-date information about foreign markets.
However, the experience of these countries cannot be generalised to all developing
countries given the lower level of infrastructure and the rigidity in both the factor as well
 Determinants of Exports in Developing Countries 1273

as commodity markets. Furthermore, the role of FDI in exports promotion in developing

countries remains controversial and depends crucially on the motive for such investment.
If the motive behind FDI is to capture domestic market (tariff-jumping type investment),
it may not contribute to export growth. On the other hand, if the motive is top tap exports
markets by taking advantage of the country’s comparative advantage, then FDI may
contribute to export growth to the extent permissible under the prevailing policy regime.
By now it is well known that an outward oriented regime encourages export-oriented FDI
while an inward-oriented policy regime attracts FDI mainly to capture domestic rather
than exports markets.
The effect of GDP and GDP growth on exports is highly significant with positive
sign. The level of production can be utilised at domestic and international level at the
same time. The developing countries have relative advantages for agriculture goods.
They can exhaust benefits of lower cost production by export growth policies. Moreover,
large size of GDP creates environments for investment decisions.
According to the regression results real exchange rate positively affects export. It
turned out to be the most significant variable affecting export. Our empirical estimates
are consistent with theory as well as empirical evidence found in other studies [e.g.
Sharma (2001)].
In the globalisation era, when the value of time is most important, the need of wide
spread communication facilities is becoming most important. For the measurement of
communication facilities we employed two variables, namely, number of Tele visions
and number of Tele phones. The effects of expansions in communication facilities are
positive and both the variables turned out to be significant. Thus expanding the net of
such facilities is helpful in exploration of new international markets. Further, these make
easy to access the world markets. As developing countries’ exports are concentrated in
few markets they can reap the benefits of global communication facilities. The results are
in line with Kumar (1998).
As expected, the effect of labour force on exports growth is positively significant.
The results are consistent with the findings in Pfaffermayr (1996).
The effect of official development assistance variable is also positively significant.
This variable reflects the development phenomena. Exports are favorably affected by
development expenditures. Because it is the sign of government positive behavior and the
future expectations of exporters that export facilities would become stronger. Indirect
taxes are also positive associated with exports. The proportion of indirect taxes varies for
different goods. So it is not necessary that indirect tax is high for exportable goods.
Furthermore, government provides tax exemptions to exporters. These are the reasons
that this variable does not adversely affect exports.
The results show that increase in savings significantly contributes to exports.
Higher savings imply lower interest rates that promote investment opportunities. The
investment is the key channel for export growth. In developing countries government
provide many incentives for export promotion strategies. The domestic investment take
place in different sectors but it is much responsive in trade sector to incentives provided
by government. After the activism of WTO developing countries are enhancing export
oriented investment schemes. These are the arguments that support our hypotheses of
investment led export growth. The empirical results also support our hypotheses. Over
1274 Majeed and Ahmad

and above, savings are the source of removal of internal and external gaps in developing
countries. As two-gap theory explains saving-investment and exports-imports gaps in
developing countries, large savings are the source of removal of domestic gap that in turn
remove external gap by enhancing export growth.
The industrialisation variable is highly significant in explaining export growth.
The importance of industrialisation for developing countries is obvious because
production levels in agricultural remains unstable due to uncertainty of weather
conditions and pest attacks and, hence, on the basis of agricultural output alone a country
cannot expand its exports potential. The results signify the importance of industrialisation
as means of sustained exports growth.

V. CONCLUSION
The objective of this study has been to find out the main factors that are important
in the determination of exports in developing countries. For this purpose the study used a
fairly large sample of panel observations for 75 developing countries over the period
1970-2004. The data are derived from the World Development Indicators (WDI) 2005.
Fixed effects (country specific intercepts) model is employed for the estimation of the
relationship of exports with its potential determinants based on the panel data. A number
of conclusions can be drawn from the study, which are summarised as follows.
• It is of critical importance to maintain a high and sustainable economic growth
rate. Evidence has shown that a sustainable growth patterns promotes exports.
• Development of the net of communication facilities is crucial not only in
promoting economic growth, as is well known, it is also important for
sustained exports performance. This finding strengthens the case for
subsidising the communications industry.
• A stable exchange rate policy has to be ensured in order to avoid the
exchange-rate risks associated with the assets, import prices and profit
considerations of direct investor in developing countries.
• Developing countries need to replace agriculture exports by the industrial
exports, which command reasonable and stable prices in the world markets.
Moreover, the industrialisation will reduce dependence on imports by
initiating the process of import substitution.

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Comments
Although a large number of studies exist on determinants of exports but a cross-
country study on this aspect of exports, specifically for developing countries, is hard to
find. The authors deserve appreciation for venturing into this area.
The paper is technically very sound. I hope that following suggestions would help
the authors to remove minor shortcomings.
The authors find that depreciation of real exchange rate has a positive influence on
exchange rate. To support the finding they make a reference to Marshal-Lerner condition.
It is note worthy that Marshal-Lerner condition is about the impact of depreciation of
nominal exchange rate. Though nominal and real rate are related through price indices,
still drawing a direct inference about impact of depreciation of real exchange rate from
Marshal-Lerner condition is perhaps not correct.
The authors recommend that developing countries should replace industrial
exports with agricultural exports. This implicitly implies that developing countries do not
enjoy comparative advantage in agricultural exports. Some discussion on this issue,
supported by literature, will make the recommendation more forceful.
The paper recommends that a stable exchange rate policy has to be ensured in
order to avoid the exchange rate risk attached to the assets, import prices and profit
considerations of direct investor in developing countries. However the results obtained
from econometric investigation do not suggest such an inference, the results only show
that depreciation of real exchange rate has a positive influence on exports. The authors
may consider taking off the recommendation.
Table 4.2(b), that shows fixed effects for 75 countries, and is spread over three
pages, if included as appendix, would perhaps make reading through the paper more
convenient.
Finally, there appears to be a typographical error in the following statement on
page 15. “Depreciation of domestic currency makes its exports cheaper and exports
expensive” This should read “Depreciation of domestic currency makes the country’s
exports cheaper and imports expensive”.

M. Idrees Khawaja
Pakistan Institute of Development Economics,
Islamabad.